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The Ultimate Rule Maker: MGM Mirage

Bet on this leading casino operator.

The high-flying gaming industry is full of Rule Makers. International Game Technology(NYSE:IGT) -- with about two-thirds share of the domestic slot market -- is one. Las Vegas Sands(NYSE:LVS) has both a strong position on the Las Vegas Strip, and the best prospects in the explosive Macau gaming market; Wynn Resorts(NYSE:WYNN) is one of the very highest-end players in both Las Vegas and Macau, Station Casinos(NYSE:STN) controls nearly every corner of the Las Vegas locals gaming market, and Harrah's Entertainment(NYSE:HET) has the dominant regional network to feed the company's 350 acres of top-notch real estate on the Las Vegas Strip.

But today, I can pick only one Rule Maker, and my choice is MGM Mirage(NYSE:MGM).

MGM Mirage has the best-performing assets in virtually every market in which the company competes, including Detroit (MGM Grand), Biloxi (Beau Rivage), Atlantic City (the Borgata, a 50-50 joint venture with Boyd Gaming(NYSE:BYD)), and of course, the Las Vegas Strip (Bellagio, Mandalay Bay, The Mirage, and MGM Grand). Meanwhile, the company's portfolio of prime Strip real estate and midmarket properties (Monte Carlo, TI, Excalibur, and Luxor) yield substantial competitive advantages.

Overall, MGM Mirage controls 831 acres of land on the Las Vegas Strip, representing some of its very best real estate. The barriers to entry are high: Now that Aztar's Tropicana Las Vegas sold for roughly $30 million to $35 million per acre, unless Harrah's starts selling its real estate, there's simply no reasonable way for regional players such as Ameristar Casinos and Pinnacle Entertainment to break into prime Strip territory on their own at this time. Toward the north end of the Strip, Boyd's Echelon Place is still three years away, and the Sahara at the very end of the Strip just sold earlier this month for an estimated $300 million to $400 million -- or about $20 million per acre.

In addition to the cost of scarce real estate, heightened materials costs and a dearth of construction labor represent additional barriers to entry. Several proposed condo projects in the area have already been cancelled because of construction costs.

MGM Mirage's control of the middle-market properties on the Las Vegas Strip is an underappreciated competitive advantage. All of the ongoing construction projects on the Strip are geared toward the high end -- including Las Vegas Sands' Palazzo, Wynn's Encore, Boyd's Echelon Place, and MGM's own Project CityCenter. Meanwhile, the middle market has gone ignored. As a result, most of MGM's competition in the middle market is past its time -- including Harrah's Bally's, Flamingo, Imperial Palace, and probably Harrah's Las Vegas itself. This leaves MGM's comparatively new Monte Carlo, TI, Luxor, and Excalibur competing at a qualitative advantage.

The kicker is that the stock isn't particularly expensive, either. With an enterprise value of less than $32 billion, the company is trading at a little more than 12 times 2006 property EBITDA. Back out the value of 300 acres of undeveloped or underutilized land on the Strip at a very modest $20 million per acre -- or $6 billion total -- and the company is trading at a more reasonable 10 times 2006 property EBITDA. Furthermore, the development pipeline is full, with the 50/50 joint venture MGM Grand Macau later this year and further Macau projects slated for the future.

Meanwhile, the company is building a permanent facility at a Detroit property that brings in $150 million in annual EBITDA; the $7 billion CityCenter Las Vegas opens in 2009; and the company has another 72 acres of land adjacent to Borgata for a potential CityCenter East. With a lock on premier properties, a reasonable valuation, and growth opportunities, MGM Mirage is a solid Rule Maker.